Labor Market Skill, Firms and Workers

The role of skilled labor in the modern economy and its importance in explaining trends in wage inequality and productivity has been a focus of a broad strand of research in economics. Labor is an input into production that is very different from capital or materials. One key difference is that workers must decide where they are going to live, and in making that decision, they thereby limit the opportunity set of jobs available to them. In turn, firms must also make a location decision that affects their access to labor and potentially affects their decisions on the technology they will adopt. While many economists have studied issues related to technology adoption and worker skill broadly, the geographic element is rarely developed. This dissertation exploits the variation in the concentration in skilled labor across local labor markets in a sample of U.S. States to study how movements of workers affect the distribution of skill across geography, the investment decisions by firms in reaction to the variation in skill and finally the effect of this variation on worker's wages across local labor markets. Given that skilled labor is an important force in the economy, variation in the concentration of skilled workers across local labor markets may also play an important role. The research set out here confirms this hypothesis. Workers locate non-randomly across geography and their movements reinforce the existing distribution of skill across local labor markets. As predicted by a model of endogenous technology, firms react to the skill level of their local labor market. Variation in firm level investment can be partially explained by variation in the availability of skilled labor. The empirical work shows that among a sample of manufacturing firms in 1992, a one standard deviation increase in county skill leads to a 10% increase in firm level investment in computers. Finally, highly skilled workers receive higher wages in metro areas with strong concentrations of skill. Deeper examination of the data shows that this wage gap is largely due to higher returns to skill in highly skilled areas.